One For Brokers

Re: Selling Brokers Win a Failure to Disclose Case

One of the really tough decisions a real estate broker or sales agent must face almost every day is how much to disclose about a defect in the property. Is it enough to just describe the fact of the existence of the defect? Should the broker discuss the possible consequences of the defect? Should the broker discuss the impact on future opportunities to expand or develop the property? Should the broker discuss the effect on the value of the property? For the seller's broker, who is trying to get the best possible price for the seller, a requirement that the selling broker discuss the impact of a defect on fair market value would create an irreconcilable conflict of interest in every transaction.

The case of Sweat v. Hollister announced on July 28, 1995 (95 CDOS 5961) answers this question by limiting the selling broker's disclosure obligation to the fact of the existence of the defect and does not require the seller's broker to affirmatively disclose the legal or practical consequences of the defect. In the Hollister case the seller and the seller's broker disclosed to the buyer that the home was located in a flood plain. The seller and the seller's broker did not disclose that under the City of Poway's ordinances, in the event of fire or other serious damage to the premises, the homeowner would not be permitted to alter or enlarge the building, which would make rebuilding economically infeasible. The court held that because the "legal consequences" of the disclosed fact were readily discoverable by the buyer, the seller and the seller's broker had no obligation to disclose the legal consequences to the buyer, and that there would be no liability either for negative fraud (i.e., failure to disclose facts not readily discoverable by the buyer) or failure to disclose (i.e., Easton).

The court gave the following additional examples of factual disclosures which do not require a discussion of legal or economic consequence: construction on filled land, violation of building codes or zoning ordinances, condemnation, termite ridden, and noisy and troublesome neighbors.

This case applies to brokers exclusively representing the seller only, and does not apply when the broker represents the buyer or both (i.e., dual agency). The buyer attempted to save his case by amending to allege the seller's broker was a dual agent, but the court held there was no factual basis for such an allegation.

A broker representing a buyer (including the seller's broker if he or she is a dual agent) ha a duty to exercise the standard of care of a reasonable broker in the community (i.e., negligence), and that standard of care in most cases will require the broker to warn his client of potential adverse consequences whether legal, economic or practical. In other words, the buyer's broker probably was negligent, and the seller's broker would have been if she had been found to be a dual agent. One more reason to avoid being a dual agent and to get the parties to sign in writing which of them the broker is representing.

Should you have any questions regarding this case, regarding how much to disclose or whether you have acted in a way that makes you a dual agent, please call me.

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